Dover Corporation (DOV) Earnings Call Transcript & Summary

Good morning, and welcome to Dover's Second Quarter 2026 Earnings Conference Call. Speaking today are Richard J. Tobin, President and Chief Executive Officer; Chris Woenker, Senior Vice President and Chief Financial Officer; and Jack Dickens, Vice President, Investor Relations. [Operator Instructions] As a reminder, ladies and gentlemen, this conference call is being recorded and your participation implies consent that our recording of this call. If you do not agree with these terms, please disconnect at this time. Thank you. I would now like to turn the call over to Mr. Jack Dickens. Please go ahead, sir.

Thank you, Katie. Good morning, everyone, and thank you for joining our call. An audio version of this call will be available on our website through August 13, and a replay link of the webcast will be archived for 90 days. Our comments today will include forward-looking statements based on current expectations. Actual results and events could differ from those statements due to a number of risks and uncertainties, which are discussed in our SEC filings. We assume no obligation to update our forward-looking statements. With that, I will turn the call over to Rich.

Thanks, Jack. Good morning, everyone. Let's get going on Slide 3. We delivered another strong quarter with results that reflect the breadth of demand across the portfolio. All-in revenue grew 7% or 5% organically, with all 5 segments posting positive organic growth. Our top line performance continued to be led by our secular growth exposed markets, which now represent approximately 25% of the portfolio, which is complemented by broad-based constructive trading conditions across most of our other end markets. Margin performance was solid. Adjusted EBITDA margin expanded 80 basis points to 25.9% as operational execution on incremental volume more than offset input cost inflation and facility consolidation costs during the quarter. Incremental margins were 38% from 25% in Q1, the healthy product mix driven by our growth platforms. Adjusted EPS was $2.74 per share, up 12% year-over-year. marking another quarter of double-digit earnings growth. Bookings were again the highlight in the quarter. Orders increased 16% year-over-year and outpaced shipments with book-to-bill at 1.06, extending strong order momentum of recent quarters and improving our visibility into the second half of the year. Our balance sheet remains a competitive advantage, and we continue to invest capital behind our businesses. During the quarter, we advanced capacity expansion projects to support growth as well as productivity investments to drive margin improvement across the portfolio. Industrial M&A markets have improved this year, and our acquisition pipeline is a number of interesting opportunities in attractive end markets. Given our first half performance, the momentum in our end markets and the visibility we have in the second half, we are raising our full year adjusted EPS guidance. We are committed to delivering double-digit adjusted EPS growth consistent with Dover's long-term performance trajectory. Let's go to Slide 5. Engineered Products was up 2%. Organically, growth was driven by strong demand in aerospace and defense components, fluid dispensing and industrial winches, along with continued stabilization in the North American vehicle aftermarket. Margins expanded 100 basis points on favorable mix and proactive cost containment actions. Clean Energy and fueling grew 9% organically with broad-based strength across clean energy components and retail fueling equipment and software. Within Clean Energy, our order book has expanded meaningfully from cryogenic components used in LNG and space launch infrastructure, driving momentum in that business. Retail fueling also remained healthy with particular strength in North American dispensers, software and below-ground equipment. Segment margin expanded 170 basis points on volume leverage and the integration benefits from recent acquisitions. Imaging & Identification grew 3% organically with growth across core marking and coding equipment, consumables, spare parts and serialization software, segment margin expanded 150 basis points on productivity and structural cost discipline. Pumps and Process Solutions grew slightly with strength in AI and energy infrastructure components, single-use biopharma and industrial pumps. Precision Components benefited from robust demand for bearings tied to steam and gas turbines. Polymer Processing had a tough comp in the quarter, which muted the segment's top line. We expect the business to return to growth in the second half of the year. Segment margin expanded 170 basis points to 35%. I think a record or a best-in-class result driven by mix of products delivered and augmented by M&A activity. Climate and Sustainability Technologies grew 8% organically. A bit of a tale of 2 cities here. Heat exchange has delivered their best quarter ever with particularly strong demand tied to liquid cooling. For data centers, we are actively working to double capacity for these products over the next 12 months. We also continue to see a welcome recovery in European residential heat pumps. We had a tough quarter in Refrigeration. Demand was strong across all the product lines, particularly CO2 systems, which is great. But raising output proved difficult in the midst of a complex facility consolidation, while simultaneously ramping labor. While we knew that there was going to be some margin pressure from running redundant facilities through the transition, we frankly did not expect to fall short of our production throughput targets. That's on me, and it cost us on the top line in the quarter, probably 1 point to 1.5 points of organic growth. We'll get this fixed over the balance of the year and expect to be reflected in the revenue growth rate and margin in the second half. I'll pass it over to Chris.

Thanks, Rich, and good morning, everyone. Let's go to our cash flow statement on Slide 6. Year-to-date free cash flow of $320 million or 8% of revenue was up 23% over prior year. This improvement was primarily driven by operating cash conversion on year-over-year earnings growth, which more than offset working capital investments tied to accelerating top line growth. Consistent with historical trends, we expect cash flow generation to accelerate meaningfully in the second half, driven by seasonal working capital liquidation in the third and fourth quarters. Our full year CapEx estimate remains $190 million to $210 million, and our free cash flow guidance remains 14% to 16% of revenue. With that, let me turn it back to Rich.

I'm on Slide 7. Broad-based booking momentum continued in Q2 with all 5 segments posting year-over-year growth. On a trailing 12-month basis, consolidated bookings were up 15% and book-to-bill is well above 1, providing further visibility and confidence in our outlook. The breadth of our order growth is important and points to continued top line strength in the second half. We are seeing particular strength in the areas we have highlighted as secular growth priorities, aerospace and defense, components for steam and gas turbines, and broader power generation infrastructure, single-use biopharma, CO2 refrigeration systems and heat exchangers for liquid cooling of data centers, where in many cases, demand is outpacing supply and extending lead times and we are actively expanding capacity in those areas. We're also seeing order improvement in parts of the portfolio that have recently been pressured. Refrigerated door cases and engineering services continued to recover from 20-year lows as national retailers reengage in maintenance and replacement activity. In polymer processing, a book-to-bill above 1 in the quarter is an early signal of stabilization and a better outlook for that longer cycle business as we look towards 2027. Turning to Slide 8. We highlight the breadth of our exposure across multiple secular growth end markets. These markets, which now represent approximately 25% of our 2026 revenue, up from 20%, I think, at the end of Q1 are becoming increasingly visible across all 5 segments. Across the energy transition in power generation markets, natural gas remains the most viable option for scalable, reliable electricity. We participate in the natural gas ecosystem through cryogenic components such as valves and vacuum jacketed piping for LNG infrastructure, and through precision components for reciprocating compressors, engines, steam and gas turbines or OEM lead times now extend for years. Our acquisition of SIKORA a year ago continues to meaningfully outperform its underwriting case, providing test and measurement equipment for high-voltage wires tied to electrification increasingly for polymer-coated fiber optic cables tied to the data center buildout. In data centers, the density of thermal requirements of new chips are driving ship towards liquid tooling as we all know, which directly benefits our connector and heat exchanger businesses through sweat, we participate across multiple parts of the liquid cooling ecosystem, supplying brace plate heat exchanges in both coolant distribution unit, and chiller OEMs. Our OPW business is also capitalizing on this growth through supplying couplers, adapters and cryogenic cooling infrastructure as well as fiberglass trench systems which were originally designed for retail fueling and are increasingly being specified for data center applications by hyperscalers. Demand tied to data center infrastructure remains exceptional with customers securing capacity well ahead of need. In CO2 refrigeration, we hold the first-mover advantage of fully platform product offering and a recently retrofitted plant in Georgia that gives us differentiated scale and product performance. Importantly, industry adoption is no longer driven by regulation, but rather by economic payoff and the total cost of ownership versus legacy refrigerants. We are also seeing robust growth across our exposures to semiconductor and electronics manufacturing, where cryogenic components, flow meters and specialized heat exchanges position us well against a durable, multiyear investment cycle. In Biopharma and Medical, our single-use connectors pumps and flow meters continue to benefit from investments behind new therapies, increasing production rates and secular shift towards single-use batch manufacturing. And finally, we have a growing exposure to space through our cryogenic components business, particularly vacuum jacketed piping and valves for launch infrastructure, as well as through our microwave products group, which supplies radio frequency filters, amplifiers and switches for satellites. All in, we expect to generate $50 million in revenue tied to space this year with order rates signaling significant momentum going forward. These are the types of markets where Dover tends to win, technically demanding applications with mission-critical components, strong customer relations and differentiated product performance. These are the hallmarks of the Dover business and support durable competitive positions, attractive margins and long growth runway. As a result, the majority of our acquisition capital over the past 5 years has been deployed in these areas and they continue to represent the most attractive opportunities in our M&A pipeline. Finally, let's go to Slide 9. Our updated full year guidance is shown on the left and reflects the raise of our organic growth and adjusted EPS outlook. For the full year, we expect positive organic growth across all 5 segments, similar top line trends that we saw in the first half of the year. The second secular growth exposed markets should continue to lead the way complemented by solid broad-based demand across most of our other end markets. The operating environment is still as its share of uncertainty, geopolitics, input costs, and evolving trade and tariff background are factors that we are managing closely. That said, demand signals remain constructive across the portfolio, and the strength and duration of our order book gives a level of visibility that supports the guidance increase. We are staying disciplined in our operations, investing behind platforms where returns are most compelling and maintaining balance sheet flexibility to play offense on capital deployment. That combination operating execution, durable demand and disciplined capital allocation is what gives us confidence in the outlook and our ability to continue creating long-term value for shareholders. With that, Jack, let's go to Q&A.

[Operator Instructions] Our first question will come from Jeff Sprague with Vertical Research.

Rich, on the refrigeration related issues, I guess, throughput issues, that 1 to 1.5 points you're talking about, is that on a Dover consolidated basis? And then really the bigger part of my question, has that caused a disruption in deployment at the customer, your customer expecting stuff to deliver, and it's not at the store and create some competitive issue for you?

Yes, it's a consolidated basis. Yes, look, we've been late on some deliveries. I think that demand in certain categories is outstripping sub capacity of the industry. So I don't think we've caused that many problems. But yes, but truly, look, we knew that we were going to have margin pressure because this was quite the project closed one plant and fit it into another one. So we thought the redundant capacity and the training of the workforce was going to pressure the margins a little bit. I think the disappointing part was the throughput has been disappointing. We've got all hands on deck to catch up in Q3 and Q4, but I'm not aware of us losing any market share to date, but it's clearly a situation nobody likes to do these projects. I think for the long term, it's the right thing to do, but these projects are hard.

And that other plant is now closed?

Not totally, I'd say, 3 quarters.

And then just on pump in process, how weak was polymer? Because it sounded like everything was good except that, and it was enough to make the segment flat. Was there some issue there, too, in the quarter?

It just tends to be lumpy. If you remember, Q4 of last year, polymers what drove the big beat we had in revenue there. So we expect -- we weren't expecting much but it just tends to be lumpy, and it was detrimental to the top line. But having said that, if it had delivered more, it would have been detrimental to the consolidated margin. So even with the loss of the revenue, the profit actually came in slightly above what our expectation was. The good news is that polymer is north of 1 in book-to-bill exiting Q2.

Our next question will come from Scott Davis with Melius Research.

I haven't heard yourself -- you flagged yourself in a call for a while, and you don't make a lot of operating mistakes. So kudos to you to own it. Look, I got to ask is the EPA mandate that pushing the CO2 stuff out to the right, is that changing anything for your customers? Are they more likely to kind of delay or pause? Or are they just too far down the road now?

We were unable to meet our delivery obligations in CO2 during Q2. I think we talked about this last quarter, Scott. I think that for us, we're not losing any market share. Our backlog looks terrific. The adoption rate is actually accelerating. We actually are pleased that there's not a time-based mandate. I don't think the industry could have met it even if it was there. So now this turns into something that is over a multiyear period, it's actually better for us.

Okay. I understand. So look, I'm looking at this cryogenic cooling opportunity that -- in the data center slide. And it seems kind of -- I don't remember you talking about that in the past, but again, this quarter is kind of blending to each other. So maybe you did. What is that product? And what's the -- can you kind of explain the opportunity there for us a bit?

Well, if you think about our legacy -- well, there's 2 things. We bought a bunch of companies in the cryogenic space that specialize in valve connectors and piping. Because of the amount of cooling that's needed in data centers, a lot of those products are becoming viable in data center applications. Now we bought them because of natural gas and LNG kind of where we live, but we're pivoting now recognizing the opportunity there. So it's relatively new, and that's probably why we haven't talked about it before.

Our next question will come from Amit Mehrotra with UBS.

Rich, I wanted to ask about orders. Obviously, book-to-bill of 1.06 is great in the context of a typical but it was down in absolute dollars sequentially, which is not something that I would sort of triangulate with early innings of ISM recovery, momentum, and some of the structural growth which now make up 1/4 of your business. I'd love to get your perspective on that. Am I reading too much into it? Are orders still good? Or how do you sort of translate a lot of the commentary on momentum building with actually down sequential absolute orders?

Well, I don't want to get into the mathematics of book-to-bill and everything else. But remember, as revenue rises, the bogey becomes larger, right? So what we've highlighted in Q1 is that it was going to come down because you had all these it's the beginning of the year, you have all these come in and that we said, let's not panic as if it drifts down from Q1 as long as it stays above 1. So to us, we're above 1, and we're above 1 across the entire portfolio, which doesn't happen often, I think, historically within Dover. So it's as broad based as it's going to get.

Yes. No, I understand the math around book-to-bill. I guess the point I'm trying to make is that the numerator of that calculation actually went down sequentially. And I don't know if that's -- there's something more to read into that or not.

I think that we're just picking at issues. Right now, our book-to-bill is solid. And like I said before, in the context of Dover, so because we touch so many different end markets, it's rare that we see it above 1 across the portfolio. It is, by definition, broad-based.

Okay. That's fair. And then just a quick follow-up. The capacity increase you're doing in SWEP, can you maybe quantify that because it definitely seems to be a capacity-constrained market and maybe just kind of quantify that in terms of how much capacity when is it going to come on? And maybe that will help us translate to some revenue opportunities as well.

I'm going to talk in general terms because there's a competitive aspect about capacity. So it's coming on sequential over the balance of the second half of the year into 2027.

And would your growth in the second quarter have been higher if that capacity -- was there, I assume the answer is obviously, yes, to that.

Yes.

Our next question will come from Nigel Coe with Wolfe Research.

So Rich, thanks for quantifying the impact of the production issues during the quarter. Just -- is it fair to assume that -- I mean it sounds like you're all hands to the deck to try and get that back in the second half, do you think it's realistic to see it comes back in the second half of the year? And then any kind of guess on sort of the total margin impact of production deal running our plants on the segment during the quarter. And I'm just curious, again, the recovery in those margins in the back half of the year?

Yes. Our expectation is that the throughput will increase sequentially over the balance of the year and that throughput will be reflected in the fixed cost absorption directly into the margins. I prefer not to quantify it, but I think that we've given you an idea before what our expectation is of -- we're talking about the Refrigeration business now in terms of margins. So as we increase throughput and we closed down the last of the redundancy costs that we have out there, naturally, those margins will lift. So our expectation is, from a profitability point of view that H2 will be materially different than H1.

Okay. And then just you kind of beat up on this issue. But if you look at the other 4 segments, incremental margin performance was a lot better than I think even your plan had for 2Q. So maybe just self-assess on where you outperformed or overdelivered versus your plan mix, productivity like price cost would have been helpful, but maybe it was. And then are you confident with the refrigeration recovery? It sounds like there's going to be some restructuring savings coming through the back half of the year. Are you confident there's a pathway to mid-30% plus type incremental margins in the back half of the year?

Okay. Where to start? I'd point to Slide 3 in the deck. I mean, I know we can -- my job is to focus on the parts that we can improve. But if we step back for a moment, that's green lights the whole way down the P&L all the way down to EPS. So I don't think we have anything to apologize for there. Yes, we had a missed opportunity in refrigeration on the top line, but -- that's why people don't have the guts to do those projects because this is -- you've got to pay in the short term for a long-term benefit, and we're convinced that our plans will be fruitful once we get done with this transition. Incremental margins up from what did I say, 25% up to what is it in this quarter? 38%. So that is more a reflection of everything else we take away the drag of refrigeration right now, everything else in the portfolio is up. So that's because every portion of the portfolio has got a plan to deliver earnings growth year-over-year. There's a variety of different ways we're going about it. So if you look at Engineered Products, for example, it's got a little bit of a muted top line because we're doing that ourselves. We are not chasing dilutive sales in vehicle sales group. And I think the management has done a great job of maximizing profitability as opposed to we were looking for the turnaround for all of the restructuring that we did in the cryogenic components business, which is in clean energy, and look at the margin expansion that we're getting there. And we expect a lot of those themes just to continue as we go through the balance of the year. So to me, when we catch up on Refrigeration, we're going to get a top line bump, and it's going to be a little bit dilutive to consolidated margins, but that's not how we run the company and try to protect that. So we're -- if I look objectively at the trajectory of the portfolio right now, sure, we got a couple of things to fix. But I don't think anybody was ever counting on DPPS delivering 35% margins.

Our next question will come from Deane Dray with RBC Capital Markets.

Thank you. Good morning, everyone.

Dean, we're going to miss it. Go ahead.